Fund firms moving to kill clones

(March 10, 2005) With the federal budget passing a third and final parliamentary vote on Wednesday, major mutual funds companies are starting to act on Ottawa’s decision to eliminate the foreign content rule.

On Thursday, Fidelity announced it will immediately reduce MERs on the RSP, or clone, versions of all its foreign funds so that the fees match those of the underlying funds.

Eighteen funds will be affected, says Fidelity’s Kim Flood. “Their MERs are currently between eight and 15 basis points higher than the MER of the underlying foreign fund.”

The decision is in anticipation of the eventual elimination of RSP funds, Fidelity said in a statement. “Fidelity will proceed to eliminate the funds as soon as the government’s proposed policy change comes into force.”

“It could be May or June before that happens and there doesn’t seem to be a uniform industry approach yet to handling that interim period,” Flood adds. “We thought it made sense to be clear.”

“This policy change is extremely positive news for Canadian investors and we want to provide them with reduced expenses immediately,” added Fidelity president Rob Strickland. “However, it is also our job to protect our unitholders’ interests, so we are taking a prudent approach to the funds themselves. As soon as it is 100% certain the legislation to eliminate the foreign property rule will come into force, we will proceed as quickly and efficiently as possible to eliminate the RSP [clone] funds altogether.”

Fidelity is not the first company to reduce fees on RSP funds. The day after the federal budget was tabled and Ottawa announced it was eliminating the 30% foreign content rule, Brandes Investment Partners announced it would absorb the added costs associated with clone funds. And HSBC Canada cut the MERs on a pair of its RSP funds earlier this week.

The beginning of the end of clone funds comes as no surprise to industry analysts. “In the months ahead, expect a blizzard of merger announcements, prospectus rewrites and the capping and eventual elimination of obsolete products as fund companies begin to dismantle an industry segment that has grown to several hundred funds and an estimated $27 billion in assets,” said Morningstar Canada investment funds editor Rudy Luukko in a recent report.

The budget passed 132-73, with Conservative members abstaining from the vote. The Liberal minority government would have been brought down if the budget was defeated.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com